A Simple Way to Capture Commodities’ Next Move

Tom Essaye | Wednesday, November 28, 2012 at 7:30 am

Since Election Day, when the correction in equities started accelerating in earnest, commodities have outperformed stocks. Today let’s look at why this trend looks set to continue, and an easy way to potentially capture commodities’ next move.

Commodities enjoyed a nice rally last week, rising 2 percent on improving fiscal-cliff sentiment, a weaker U.S. dollar and dovish comments by multiple Federal Reserve governors, including Ben Bernanke. As of Monday’s close, commodities were 1 percent higher than the Election Day close, while equities remain multiple percentage points lower.

This confirms what I’ve been saying to my Million-Dollar Contrarian Portfolio subscribers about the equity-market correction.

It’s not about the potential for a fundamental downgrade in the global economic outlook or fears of another debt crisis. In that case, commodities would be weaker than stocks — like they were in May and June when Europe was the No. 1 macro concern.

The flash Purchasing Managers Index figures from the U.S., Europe and China all beat expectations. The numbers from China and Europe were really more-important than those from the United States, as there is ample evidence showing the U.S. economy is solidly in (albeit slow) growth mode.

The Chinese flash PMI broke above the critical 50 level that determines whether there is contraction or growth. It is now at a 13-month high, further suggesting the economically stimulating efforts of the past few months are continuing to take hold.

China’s growth accelerating remains an important positive catalyst for the global macro economy.

In Europe, the headline composite PMIs (which combine manufacturing and services) were little changed (up 0.01 to 45.8). But the devil’s in the details. And the report shows some reason for cautious optimism that the European economy may be starting to level off.

The manufacturing component of the European PMI rose 0.8 to 45.9, but I think what’s more important is the new orders component, which rose 0.9 to 44.1. Other details of the manufacturing PMI suggested future increases as well, including low inventory levels.

This bigger picture is particularly important to watch right now. Although the U.S. stock markets are concerned about the fiscal cliff and a decline into year-end, the global macro economy is actually showing signs of bottoming. And, in the case of China, it shows accelerating growth.

You might have also heard the saying, “As China goes, so go commodities.” With both on the rise, both can be a timely play. However, I’m keeping a closer eye on commodities, and here’s one way you can do the same.

Slow Growth Is Still Growth;
Here’s One Way to Take Advantage

U.S. political gridlock has halted a rise in equities. But commodities trading, which is more heavily influenced by growth or contraction in the global economy, has been rising as prospects appear to be improving.

And I think the easiest way for investors to add commodities to their portfolio is through the Power Shares Deutsche Bank Commodity Index Tracking Fund (DBC), an ETF that provides exposure to major commodity groups including metals, energy and agriculture.

While I expect the U.S. markets to continue to be held hostage by fiscal-cliff negotiations between now and the end of the year, incredibly accommodative monetary policy unleashed across the globe appears to finally be working.

And if that trend continues, commodities will be some of the largest beneficiaries.

Best,

Tom

Tom Essaye oversees Weiss Group’s Million-Dollar Contrarian Portfolio, in which company founder Martin D. Weiss has staked $1 million of his own money.

Tom began his financial-services career at Merrill Lynch, where he worked on trading desks on the floor of the New York Stock Exchange. While on the floor, he managed multi-million dollar equity trades from some of the biggest hedge- and mutual-fund firms.